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The precise details underlying the European Commission’s (EC) April 15 Statement of Objections (SO), the EC’s equivalent of an antitrust complaint, against Google, centered on the company’s promotion of its comparison shopping service (CSS), “Google Shopping,” have not yet been made public. Nevertheless, the EC’s fact sheet describing the theory of the case is most discouraging to anyone who believes in economically sound, consumer welfare-oriented antitrust enforcement. Put simply, the SO alleges that Google is “abusing its dominant position” in online search services throughout Europe by systematically positioning and prominently displaying its CSS in its general search result pages, “irrespective of its merits,” causing the Google CSS to achieve higher rates of growth than CSSs promoted by rivals. According to the EC, this behavior “has a negative impact on consumers and innovation”. Why so? Because this “means that users do not necessarily see the most relevant shopping results in response to their queries, and that incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google’s product.” (Emphasis added.) The EC’s proposed solution? “Google should treat its own comparison shopping services and those of rivals in the same way.”

The EC’s latest action may represent only “the tip of a Google EC antitrust iceberg,” since the EC has stated that it is continuing to investigate other aspects of Google’s behavior, including Google agreements with respect to the Android operating system, plus “the favourable treatment by Google in its general search results of other specialised search services, and concerns with regard to copying of rivals’ web content (known as ‘scraping’), advertising exclusivity and undue restrictions on advertisers.” For today, I focus on the tip, leaving consideration of the bulk of the iceberg to future commentaries, as warranted. (Truth on the Market has addressed Google-related antitrust issues previously — see, for example, here, here, and here.)

The EC’s April 15 Google SO is troublesome in multiple ways.

First, the claim that Google does not “necessarily” array the most relevant search results in a manner desired by consumers appears to be in tension with the findings of an exhaustive U.S. antitrust investigation of the company. As U.S. Federal Trade Commissioner Josh Wright pointed out in a recent speech, the FTC’s 2013 “closing statement [in its Google investigation] indicates that Google’s so-called search bias did not, in fact, harm consumers; to the contrary, the evidence suggested that ‘Google likely benefited consumers by prominently displaying its vertical content on its search results page.’ The Commission reached this conclusion based upon, among other things, analyses of actual consumer behavior – so-called ‘click through’ data – which showed how consumers reacted to Google’s promotion of its vertical properties.”

Second, even assuming that Google’s search engine practices have weakened competing CSSs, that would not justify EC enforcement action against Google. As Commissioner Wright also explained, the FTC “accepted arguments made by competing websites that Google’s practices injured them and strengthened Google’s market position, but correctly found that these were not relevant considerations in a proper antitrust analysis focused upon consumer welfare rather than harm to competitors.” The EC should keep this in mind, given that, as former EC Competition Commissioner Joaquin Almunia emphasized, “[c]onsumer welfare is not just a catchy phrase. It is the cornerstone, the guiding principle of EU competition policy.”

Third, and perhaps most fundamentally, although EC disclaims an interest in “interfere[ing] with” Google’s search engine algorithm, dictating an “equal treatment of competitors” result implicitly would require intrusive micromanagement of Google’s search engine – a search engine which is at the heart of the company’s success and has bestowed enormous welfare benefits on consumers and producers alike. There is no reason to believe that EC policing of EC CSS listings to promote an “equal protection of competitors” mandate would result in a search experience that better serves consumers than the current Google policy. Consistent with this point, in its 2013 Google closing statement, the FTC observed that it lacked the ability to “second-guess” product improvements that plausibly benefit consumers, and it stressed that “condemning legitimate product improvements risks harming consumers.”

Fourth, competing CSSs have every incentive to inform consumers if they believe that Google search results are somehow “inferior” to their offerings. They are free to advertise and publicize the merits of their services, and third party intermediaries that rate browsers may be expected to report if Google Shopping consistently offers suboptimal consumer services. In short, “the word will get out.” Even in the absence of perfect information, consumers can readily at low cost browse alternative CSSs to determine whether they prefer their services to Google’s – “help is only a click away.”

Fifth, the most likely outcome of an EC “victory” in this case would be a reduced incentive for Google to invest in improving its search engine, knowing that its ability to monetize search engine improvements could be compromised by future EC decisions to prevent an improved search engine from harming rivals. What’s worse, other developers of service platforms and other innovative business improvements would similarly “get the message” that it would not be worth their while to innovate to the point of dominance, because their returns to such innovation would be constrained. In sum, companies in a wide variety of sectors would have less of an incentive to innovate, and this in turn would lead to reduced welfare gains and benefits to consumers. This would yield (as the EC’s fact sheet put it) “a negative impact on consumers and innovation”, because companies across industries operating in Europe would know that if their product were too good, they would attract the EC’s attention and be put in their place. In other words, a successful EC intervention here could spawn the very welfare losses (magnified across sectors) that the Commission cited as justification for reining in Google in the first place!

Finally, it should come as no surprise that a coalition of purveyors of competing search engines and online shopping sites lobbied hard for EC antitrust action against Google. When government intervenes heavily and often in markets to “correct” perceived “abuses,” private actors have a strong incentive to expend resources on achieving government actions that disadvantage their rivals – resources that could otherwise have been used to compete more vigorously and effectively. In short, the very existence of expansive regulatory schemes disincentivizes competition on the merits, and in that regard tends to undermine welfare. Government officials should keep that firmly in mind when private actors urge them to act decisively to “cure” marketplace imperfections by limiting a rival’s freedom of action.

Let us hope that the EC takes these concerns to heart before taking further action against Google.

Recent years have seen an increasing interest in incorporating privacy into antitrust analysis. The FTC and regulators in Europe have rejected these calls so far, but certain scholars and activists continue their attempts to breathe life into this novel concept. Elsewhere we have written at length on the scholarship addressing the issue and found the case for incorporation wanting. Among the errors proponents make is a persistent (and woefully unsubstantiated) assertion that online data can amount to a barrier to entry, insulating incumbent services from competition and ensuring that only the largest providers thrive. This data barrier to entry, it is alleged, can then allow firms with monopoly power to harm consumers, either directly through “bad acts” like price discrimination, or indirectly by raising the costs of advertising, which then get passed on to consumers.

A case in point was on display at last week’s George Mason Law & Economics Center Briefing on Big Data, Privacy, and Antitrust. Building on their growing body of advocacy work, Nathan Newman and Allen Grunes argued that this hypothesized data barrier to entry actually exists, and that it prevents effective competition from search engines and social networks that are interested in offering services with heightened privacy protections.

According to Newman and Grunes, network effects and economies of scale ensure that dominant companies in search and social networking (they specifically named Google and Facebook — implying that they are in separate markets) operate without effective competition. This results in antitrust harm, they assert, because it precludes competition on the non-price factor of privacy protection.

In other words, according to Newman and Grunes, even though Google and Facebook offer their services for a price of $0 and constantly innovate and upgrade their products, consumers are nevertheless harmed because the business models of less-privacy-invasive alternatives are foreclosed by insufficient access to data (an almost self-contradicting and silly narrative for many reasons, including the big question of whether consumers prefer greater privacy protection to free stuff). Without access to, and use of, copious amounts of data, Newman and Grunes argue, the algorithms underlying search and targeted advertising are necessarily less effective and thus the search product without such access is less useful to consumers. And even more importantly to Newman, the value to advertisers of the resulting consumer profiles is diminished.

Newman has put forth a number of other possible antitrust harms that purportedly result from this alleged data barrier to entry, as well. Among these is the increased cost of advertising to those who wish to reach consumers. Presumably this would harm end users who have to pay more for goods and services because the costs of advertising are passed on to them. On top of that, Newman argues that ad networks inherently facilitate price discrimination, an outcome that he asserts amounts to antitrust harm.

FTC Commissioner Maureen Ohlhausen (who also spoke at the George Mason event) recently made the case that antitrust law is not well-suited to handling privacy problems. She argues — convincingly — that competition policy and consumer protection should be kept separate to preserve doctrinal stability. Antitrust law deals with harms to competition through the lens of economic analysis. Consumer protection law is tailored to deal with broader societal harms and aims at protecting the “sanctity” of consumer transactions. Antitrust law can, in theory, deal with privacy as a non-price factor of competition, but this is an uneasy fit because of the difficulties of balancing quality over two dimensions: Privacy may be something some consumers want, but others would prefer a better algorithm for search and social networks, and targeted ads with free content, for instance.

In fact, there is general agreement with Commissioner Ohlhausen on her basic points, even among critics like Newman and Grunes. But, as mentioned above, views diverge over whether there are some privacy harms that should nevertheless factor into competition analysis, and on whether there is in fact a data barrier to entry that makes these harms possible.

As we explain below, however, the notion of data as an antitrust-relevant barrier to entry is simply a myth. And, because all of the theories of “privacy as an antitrust harm” are essentially predicated on this, they are meritless.

First, data is useful to all industries — this is not some new phenomenon particular to online companies

It bears repeating (because critics seem to forget it in their rush to embrace “online exceptionalism”) that offline retailers also receive substantial benefit from, and greatly benefit consumers by, knowing more about what consumers want and when they want it. Through devices like coupons and loyalty cards (to say nothing of targeted mailing lists and the age-old practice of data mining check-out receipts), brick-and-mortar retailers can track purchase data and better serve consumers. Not only do consumers receive better deals for using them, but retailers know what products to stock and advertise and when and on what products to run sales. For instance:

Following its acquisition of Kosmix in 2011, Walmart established @WalmartLabs, which created its own product search engine for online shoppers. In the first year of its use alone, the number of customers buying a product on Walmart.com after researching a purchase increased by 20 percent. According to Ron Bensen, the vice president of engineering at @WalmartLabs, the combination of in-store and online data could give brick-and-mortar retailers like Walmart an advantage over strictly online stores.

Panera and a whole host of restaurants, grocery stores, drug stores and retailers use loyalty cards to advertise and learn about consumer preferences.

And of course there is a host of others uses for data, as well, including security, fraud prevention, product optimization, risk reduction to the insured, knowing what content is most interesting to readers, etc. The importance of data stretches far beyond the online world, and far beyond mere retail uses more generally. To describe even online giants like Amazon, Apple, Microsoft, Facebook and Google as having a monopoly on data is silly.

Second, it’s not the amount of data that leads to success but building a better mousetrap

The value of knowing someone’s birthday, for example, is not in that tidbit itself, but in the fact that you know this is a good day to give that person a present. Most of the data that supports the advertising networks underlying the Internet ecosphere is of this sort: Information is important to companies because of the value that can be drawn from it, not for the inherent value of the data itself. Companies don’t collect information about you to stalk you, but to better provide goods and services to you.

Moreover, data itself is not only less important than what can be drawn from it, but data is also less important than the underlying product it informs. For instance, Snapchat created a challenger to Facebook so successfully (and in such short time) that Facebook attempted to buy it for $3 billion (Google offered $4 billion). But Facebook’s interest in Snapchat wasn’t about its data. Instead, Snapchat was valuable — and a competitive challenge to Facebook — because it cleverly incorporated the (apparently novel) insight that many people wanted to share information in a more private way.

Relatedly, Twitter, Instagram, LinkedIn, Yelp, Pinterest (and Facebook itself) all started with little (or no) data and they have had a lot of success. Meanwhile, despite its supposed data advantages, Google’s attempts at social networking — Google+ — have never caught up to Facebook in terms of popularity to users (and thus not to advertisers either). And scrappy social network Ello is starting to build a significant base without data collection for advertising at all.

At the same time it’s simply not the case that the alleged data giants — the ones supposedly insulating themselves behind data barriers to entry — actually have the type of data most relevant to startups anyway. As Andres Lerner has argued, if you wanted to start a travel business, the data from Kayak or Priceline would be far more relevant. Or if you wanted to start a ride-sharing business, data from cab companies would be more useful than the broad, market-cross-cutting profiles Google and Facebook have. Consider companies like Uber, Lyft and Sidecar that had no customer data when they began to challenge established cab companies that did possess such data. If data were really so significant, they could never have competed successfully. But Uber, Lyft and Sidecar have been able to effectively compete because they built products that users wanted to use — they came up with an idea for a better mousetrap.The data they have accrued came after they innovated, entered the market and mounted their successful challenges — not before.

In reality, those who complain about data facilitating unassailable competitive advantages have it exactly backwards. Companies need to innovate to attract consumer data, otherwise consumers will switch to competitors (including both new entrants and established incumbents). As a result, the desire to make use of more and better data drives competitive innovation, with manifestly impressive results: The continued explosion of new products, services and other apps is evidence that data is not a bottleneck to competition but a spur to drive it.

Third, competition online is one click or thumb swipe away; that is, barriers to entry and switching costs are low

Somehow, in the face of alleged data barriers to entry, competition online continues to soar, with newcomers constantly emerging and triumphing. This suggests that the barriers to entry are not so high as to prevent robust competition.

Again, despite the supposed data-based monopolies of Facebook, Google, Amazon, Apple and others, there exist powerful competitors in the marketplaces they compete in:

With its recent acquisition of the shopping search engine, TheFind, and test-run of a “buy” button, Facebook is also gearing up to become a major competitor in the realm of e-commerce, challenging Amazon.

Even assuming for the sake of argument that data creates a barrier to entry, there is little evidence that consumers cannot easily switch to a competitor. While there are sometimes network effects online, like with social networking, history still shows that people will switch. MySpace was considered a dominant network until it made a series of bad business decisions and everyone ended up on Facebook instead. Similarly, Internet users can and do use Bing, DuckDuckGo, Yahoo, and a plethora of more specialized search engines on top of and instead of Google. And don’t forget that Google itself was once an upstart new entrant that replaced once-household names like Yahoo and AltaVista.

Fourth, access to data is not exclusive

Critics like Newman have compared Google to Standard Oil and argued that government authorities need to step in to limit Google’s control over data. But to say data is like oil is a complete misnomer. If Exxon drills and extracts oil from the ground, that oil is no longer available to BP. Data is not finite in the same way. To use an earlier example, Google knowing my birthday doesn’t limit the ability of Facebook to know my birthday, as well. While databases may be proprietary, the underlying data is not. And what matters more than the data itself is how well it is analyzed.

This is especially important when discussing data online, where multi-homing is ubiquitous, meaning many competitors end up voluntarily sharing access to data. For instance, I can use the friend-finder feature on WordPress to find Facebook friends, Google connections, and people I’m following on Twitter who also use the site for blogging. Using this feature allows WordPress to access your contact list on these major online players.

Further, it is not apparent that Google’s competitors have less data available to them. Microsoft, for instance, has admitted that it may actually have more data. And, importantly for this discussion, Microsoft may have actually garnered some of its data for Bing from Google.

If Google has a high cost per click, then perhaps it’s because it is worth it to advertisers: There are more eyes on Google because of its superior search product. Contra Newman and Grunes, Google may just be more popular for consumers and advertisers alike because the algorithm makes it more useful, not because it has more data than everyone else.

Fifth, the data barrier to entry argument does not have workable antitrust remedies

The misguided logic of data barrier to entry arguments leaves a lot of questions unanswered. Perhaps most important among these is the question of remedies. What remedy would apply to a company found guilty of leveraging its market power with data?

It’s actually quite difficult to conceive of a practical means for a competition authority to craft remedies that would address the stated concerns without imposing enormous social costs. In the unilateral conduct context, the most obvious remedy would involve the forced sharing of data.

On the one hand, as we’ve noted, it’s not clear this would actually accomplish much. If competitors can’t actually make good use of data, simply having more of it isn’t going to change things. At the same time, such a result would reduce the incentive to build data networks to begin with. In their startup stage, companies like Uber and Facebook required several months and hundreds of thousands, if not millions, of dollars to design and develop just the first iteration of the products consumers love. Would any of them have done it if they had to share their insights? In fact, it may well be that access to these free insights is what competitors actually want; it’s not the data they’re lacking, but the vision or engineering acumen to use it.

Other remedies limiting collection and use of data are not only outside of the normal scope of antitrust remedies, they would also involve extremely costly court supervision and may entail problematic “collisions between new technologies and privacy rights,” as the last year’s White House Report on Big Data and Privacy put it.

It is equally unclear what an antitrust enforcer could do in the merger context. As Commissioner Ohlhausen has argued, blocking specific transactions does not necessarily stop data transfer or promote privacy interests. Parties could simply house data in a standalone entity and enter into licensing arrangements. And conditioning transactions with forced data sharing requirements would lead to the same problems described above.

If antitrust doesn’t provide a remedy, then it is not clear why it should apply at all. The absence of workable remedies is in fact a strong indication that data and privacy issues are not suitable for antitrust. Instead, such concerns would be better dealt with under consumer protection law or by targeted legislation.

The Wall Street Journal reported yesterday that the FTC Bureau of Competition staff report to the commissioners in the Google antitrust investigation recommended that the Commission approve an antitrust suit against the company.

While this is excellent fodder for a few hours of Twitter hysteria, it takes more than 140 characters to delve into the nuances of a 20-month federal investigation. And the bottom line is, frankly, pretty ho-hum.

One of life’s unfortunate certainties, as predictable as death and taxes, is this: regulators regulate.

The Bureau of Competition staff is made up of professional lawyers — many of them litigators, whose existence is predicated on there being actual, you know, litigation. If you believe in human fallibility at all, you have to expect that, when they err, FTC staff errs on the side of too much, rather than too little, enforcement.

So is it shocking that the FTC staff might recommend that the Commission undertake what would undoubtedly have been one of the agency’s most significant antitrust cases? Hardly.

Regardless, it also bears pointing out that the staff did not recommend the FTC bring suit on the central issue of search bias “because of the strong procompetitive justifications Google has set forth”:

Complainants allege that Google’s conduct is anticompetitive because if forecloses alternative search platforms that might operate to constrain Google’s dominance in search and search advertising. Although it is a close call, we do not recommend that the Commission issue a complaint against Google for this conduct.

But this caveat is enormous. To report this as the FTC staff recommending a case is seriously misleading. Here they are forbearing from bringing 99% of the case against Google, and recommending suit on the marginal 1% issues. It would be more accurate to say, “FTC staff recommends no case against Google, except on a couple of minor issues which will be immediately settled.”

And in fact it was on just these minor issues that Google agreed to voluntary commitments to curtail some conduct when the FTC announced it was not bringing suit against the company.

The Wall Street Journal quotes some other language from the staff report bolstering the conclusion that this is a complex market, the conduct at issue was ambiguous (at worst), and supporting the central recommendation not to sue:

We are faced with a set of facts that can most plausibly be accounted for by a narrative of mixed motives: one in which Google’s course of conduct was premised on its desire to innovate and to produce a high quality search product in the face of competition, blended with the desire to direct users to its own vertical offerings (instead of those of rivals) so as to increase its own revenues. Indeed, the evidence paints a complex portrait of a company working toward an overall goal of maintaining its market share by providing the best user experience, while simultaneously engaging in tactics that resulted in harm to many vertical competitors, and likely helped to entrench Google’s monopoly power over search and search advertising.

On a global level, the record will permit Google to show substantial innovation, intense competition from Microsoft and others, and speculative long-run harm.

That the staff concluded that some of what Google was doing “harmed competitors” isn’t surprising — there were lots of competitors parading through the FTC on a daily basis claiming Google harmed them. But antitrust is about protecting consumers, not competitors. Far more important is the staff finding of “substantial innovation, intense competition from Microsoft and others, and speculative long-run harm.”

Indeed, the combination of “substantial innovation,” “intense competition from Microsoft and others,” and “Google’s strong procompetitive justifications” suggests a well-functioning market. It similarly suggests an antitrust case that the FTC would likely have lost. The FTC’s litigators should probably be grateful that the commissioners had the good sense to vote to close the investigation.

Meanwhile, the Wall Street Journal also reports that the FTC’s Bureau of Economics simultaneously recommended that the Commission not bring suit at all against Google. It is not uncommon for the lawyers and the economists at the Commission to disagree. And as a general (though not inviolable) rule, we should be happy when the Commissioners side with the economists.

Microsoft and its allies (the Microsoft-funded trade organization FairSearch and the prolific Google critic Ben Edelman) have been highly critical of Google’s use of “secret” contracts to license its proprietary suite of mobile apps, Google Mobile Services, to device manufacturers.

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

I won’t rehash all of those arguments here, but rather point to another indication that such contract terms are not anticompetitive: The recent revelation that they are used by others in the same industry — including, we’ve learned (to no one’s surprise), Microsoft.

Some quick background: As I said in my previous post, it is no secret that equipment manufacturers have the option to license a free set of Google apps (Google Mobile Services) and set Google as the default search engine. However, Google allows OEMs to preinstall other competing search engines as they see fit. Indeed, no matter which applications come pre-installed, the user can easily download Yahoo!, Microsoft’s Bing, Yandex, Naver, DuckDuckGo and other search engines for free from the Google Play Store.

But Microsoft has sought to impose even-more stringent constraints on its device partners. One of the agreements disclosed in the Microsoft-Samsung contract litigation, the “Microsoft-Samsung Business Collaboration Agreement,” requires Samsung to set Bing as the search default for all Windows phones and precludes Samsung from pre-installing any other search applications on Windows-based phones. Samsung must configure all of its Windows Phones to use Microsoft Search Services as the

default Web Search . . . in all instances on such properties where Web Search can be launched or a Query submitted directly by a user (including by voice command) or automatically (including based on location or context).

Interestingly, the agreement also requires Samsung to install Microsoft Search Services as a non-default search option on all of Samsung’s non-Microsoft Android devices (to the extent doing so does not conflict with other contracts).

Of course, the Microsoft-Samsung contract is expressly intended to remain secret: Its terms are declared to be “Confidential Information,” prohibiting Samsung from making “any public statement regarding the specific terms of [the] Agreement” without Microsoft’s consent.

Meanwhile, the accompanying Patent License Agreement provides that

all terms and conditions in this Agreement, including the payment amount [and the] specific terms and conditions in this Agreement (including, without limitation, the amount of any fees and any other amounts payable to Microsoft under this Agreement) are confidential and shall not be disclosed by either Party.

In addition to the confidentiality terms spelled out in these two documents, there is a separate Non-Disclosure Agreement—to further dispel any modicum of doubt on that score. Perhaps this is why Edelman was unaware of the ubiquity of such terms (and their confidentiality) when he issued his indictment of the Google agreements but neglected to mention Microsoft’s own.

In light of these revelations, Edelman’s scathing contempt for the “secrecy” of Google’s MADAs seems especially disingenuous:

MADA secrecy advances Google’s strategic objectives. By keeping MADA restrictions confidential and little-known, Google can suppress the competitive response…Relatedly, MADA secrecy helps prevent standard market forces from disciplining Google’s restriction. Suppose consumers understood that Google uses tying and full-line-forcing to prevent manufacturers from offering phones with alternative apps, which could drive down phone prices. Then consumers would be angry and would likely make their complaints known both to regulators and to phone manufacturers. Instead, Google makes the ubiquitous presence of Google apps and the virtual absence of competitors look like a market outcome, falsely suggesting that no one actually wants to have or distribute competing apps.

If, as Edelman claims, Google’s objectionable contract terms “serve both to help Google expand into areas where competition could otherwise occur, and to prevent competitors from gaining traction,” then what are the very same sorts of terms doing in Microsoft’s contracts with Samsung? The revelation that Microsoft employs contracts similar to — and similarly confidential to — Google’s highlights the hypocrisy of claims that such contracts serve anticompetitive aims.

In fact, as I discussed in my previous post, there are several pro-competitive justifications for such agreements, whether undertaken by a market leader or a newer entrant intent on catching up. Most obviously, such contracts help to ensure that consumers receive the user experience they demand on devices manufactured by third parties. But more to the point, the fact that such arrangements permeate the market and are adopted by both large and small competitors is strong indication that such terms are pro-competitive.

At the very least, they absolutely demonstrate that such practices do not constitute prima facie evidence of the abuse of market power.

[Reminder: See the “Disclosures” page above. ICLE has received financial support from Google in the past, and I formerly worked at Microsoft. Of course, the views here are my own, although I encourage everyone to agree with them.]

Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again.

The latest volley in its tiresome and ironic campaign to bludgeon Google with the same regulatory club once used against Microsoft itself is the company’s effort to foment an Android-related antitrust case in Europe.

In a recent polemic, Microsoft consultant (and business school professor) Ben Edelman denounces Google for requiring that, if device manufacturers want to pre-install key Google apps on Android devices, they “must install all the apps Google specifies, with the prominence Google requires, including setting these apps as defaults where Google instructs.” Edelman trots out gasp-worthy “secret” licensing agreements that he claims support his allegation (more on this later).

Similarly, a recent Wall Street Journal article, “Android’s ‘Open’ System Has Limits,” cites Edelman’s claim that limits on the licensing of Google’s proprietary apps mean that the Android operating system isn’t truly open source and comes with “strings attached.”

In fact, along with the Microsoft-funded trade organization FairSearch, Edelman has gone so far as to charge that this “tying” constitutes an antitrust violation. It is this claim that Microsoft and a network of proxies brought to the Commission when their efforts to manufacture a search-neutrality-based competition case against Google failed.

But before getting too caught up in the latest round of anti-Google hysteria, it’s worth noting that the Federal Trade Commission has already reviewed these claims. After a thorough, two-year inquiry, the FTC found the antitrust arguments against Google to be without merit. The South Korea Fair Trade Commission conducted its own two year investigation into Google’s Android business practices and dismissed the claims before it as meritless, as well.

(T)he (EU) Fairsearch complaint ultimately does not aim to protect competition or consumers, as it pretends to. It rather strives to shelter Microsoft from competition by abusing competition law to attack Google’s business model and subvert competition.

It’s time to take a step back and consider the real issues at play.

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.” He writes, “I see no way to reconcile the MADA restrictions with [Android openness].”

Conveniently, however, Edelman neglects to cite to Section 2.6 of the MADA:

The parties will create an open environment for the Devices by making all Android Products and Android Application Programming Interfaces available and open on the Devices and will take no action to limit or restrict the Android platform.

Professor Korber’s analysis provides a straight-forward explanation of the relationship between Android and its OEM licensees:

Google offers Android to OEMs on a royalty-free basis. The licensees are free to download, distribute and even modify the Android code as they like. OEMs can create mobile devices that run “pure” Android…or they can apply their own user interfaces (IO) and thereby hide most of the underlying Android system (e.g. Samsung’s “TouchWiz” or HTC’s “Sense”). OEMs make ample use of this option.

The truth is that the Android operating system remains, as ever, definitively open source — but Android’s openness isn’t really what the fuss is about. In this case, the confusion (or obfuscation) stems from the casual confounding of Google Apps with the Android Operating System. As we’ll see, they aren’t the same thing.

Still, Microsoft’s apologists continue to claim that Android licensees can’t choose to opt out of Google’s applications suite — even though, according to a new report from ABI Research, 20 percent of smartphones shipped between May and July 2014 were based on a “Google-less” version of the Android OS. And that number is consistently increasing: Analysts predict that by 2015, 30 percent of Android phones won’t access Google Services.

It’s true that equipment manufacturers who choose the Android operating system havethe option to include the suite of integrated, proprietary Google apps and services licensed (royalty-free) under the name Google Mobile Services (GMS). GMS includes Google Search, Maps, Calendar, YouTube and other apps that together define the “Google Android experience” that users know and love.

But Google Android is far from the only Android experience.

Even if a manufacturer chooses to license Google’s apps suite, Google’s terms are not exclusive. Handset makers are free to install competing applications, including other search engines, map applications or app stores.

Although Google requires that Google Search be made easily accessible (hardly a bad thing for consumers, as it is Google Search that finances the development and maintenance of all of the other (free) apps from which Google otherwise earns little to no revenue), OEMs and users alike can (and do) easily install and access other search engines in numerous ways. As Professor Korber notes:

The standard MADA does not entail any exclusivity for Google Search nor does it mandate a search default for the web browser.

Regardless, integrating key Google apps (like Google Search and YouTube) with other apps the company offers (like Gmail and Google+) is an antitrust problem only if it significantly forecloses competitors from these apps’ markets compared to a world without integrated Google apps, and without pro-competitive justification. Neither is true, despite the unsubstantiated claims to the contrary from Edelman, FairSearch and others.

Consumers and developers expect and demand consistency across devices so they know what they’re getting and don’t have to re-learn basic functions or program multiple versions of the same application. Indeed, Apple’s devices are popular in part because Apple’s closed iOS provides a predictable, seamless experience for users and developers.

But making Android competitive with its tightly controlled competitors requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS). Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.

Unlike Android, Apple prohibits modifications of its operating system by downstream partners and users, and completely controls the pre-installation of apps on iOS devices. It deeply integrates applications into iOS, including Apple Maps, iTunes, Siri, Safari, its App Store and others. Microsoft has copied Apple’s model to a large degree, hard-coding its own applications (including Bing, Windows Store, Skype, Internet Explorer, Bing Maps and Office) into the Windows Phone operating system.

In the service of creating and maintaining a competitive platform, each of these closed OS’s bakes into its operating system significant limitations on which third-party apps can be installed and what they can (and can’t) do. For example, neither platform permits installation of a third-party app store, and neither can be significantly customized. Apple’s iOS also prohibits users from changing default applications — although the soon-to-be released iOS 8 appears to be somewhat more flexible than previous versions.

In addition to pre-installing a raft of their own apps and limiting installation of other apps, both Apple and Microsoft enable greater functionality for their own apps than they do the third-party apps they allow.

For example, Apple doesn’t make available for other browsers (like Google’s Chrome) all the JavaScript functionality that it does for Safari, and it requires other browsers to use iOS Webkit instead of their own web engines. As a result there are things that Chrome can’t do on iOS that Safari and only Safari can do, and Chrome itself is hamstrung in implementing its own software on iOS. This approach has led Mozilla to refuse to offer its popular Firefox browser for iOS devices (while it has no such reluctance about offering it on Android).

On Windows Phone, meanwhile, Bing is integrated into the OS and can’t be removed. Only in markets where Bing is not supported (and with Microsoft’s prior approval) can OEMs change the default search app from Bing. While it was once possible to change the default search engine that opens in Internet Explorer (although never from the hardware search button), the Windows 8.1 Hardware Development Notes, updated July 22, 2014, state:

By default, the only search provider included on the phone is Bing. The search provider used in the browser is always the same as the one launched by the hardware search button.

Both Apple iOS and Windows Phone tightly control the ability to use non-default apps to open intents sent from other apps and, in Windows especially, often these linkages can’t be changed.

As a result of these sorts of policies, maintaining the integrity — and thus the brand — of the platform is (relatively) easy for closed systems. While plenty of browsers are perfectly capable of answering an intent to open a web page, Windows Phone can better ensure a consistent and reliable experience by forcing Internet Explorer to handle the operation.

By comparison, Android, with or without Google Mobile Services, is dramatically more open, more flexible and customizable, and more amenable to third-party competition. Even the APIs that it uses to integrate its apps are open to all developers, ensuring that there is nothing that Google apps are able to do that non-Google apps with the same functionality are prevented from doing.

In other words, not just Gmail, but any email app is permitted to handle requests from any other app to send emails; not just Google Calendar but any calendar app is permitted to handle requests from any other app to accept invitations.

In no small part because of this openness and flexibility, current reports indicate that Android OS runs 85 percent of mobile devices worldwide. But it is OEM giant Samsung, not Google, that dominates the market, with a 65 percent share of all Android devices. Competition is rife, however, especially in emerging markets. In fact, according to one report, “Chinese and Indian vendors accounted for the majority of smartphone shipments for the first time with a 51% share” in 2Q 2014.

As he has not been in the past, Edelman is at least nominally circumspect in his unsubstantiated legal conclusions about Android’s anticompetitive effect:

Applicable antitrust law can be complicated: Some ties yield useful efficiencies, and not all ties reduce welfare.

Given Edelman’s connections to Microsoft and the realities of the market he is discussing, it could hardly be otherwise. If every integration were an antitrust violation, every element of every operating system — including Apple’s iOS as well as every variant of Microsoft’s Windows — should arguably be the subject of a government investigation.

In truth, Google has done nothing more than ensure that its own suite of apps functions on top of Android to maintain what Google sees as seamless interconnectivity, a high-quality experience for users, and consistency for application developers — while still allowing handset manufacturers room to innovate in a way that is impossible on other platforms. This is the very definition of pro-competitive, and ultimately this is what allows the platform as a whole to compete against its far more vertically integrated alternatives.

Which brings us back to Microsoft. On the conclusion of the FTC investigation in January 2013, a GigaOm exposé on the case had this to say:

Critics who say Google is too powerful have nagged the government for years to regulate the company’s search listings. But today the critics came up dry….

The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated….

The FTC is also a loser because it ran a high profile two-year investigation but came up dry.

The Children’s Online Privacy Protection Act (COPPA) continues to be a hot button issue for many online businesses and privacy advocates. On November 14, Senator Markey, along with Senator Kirk and Representatives Barton and Rush introduced the Do Not Track Kids Act of 2013 to amend the statute to include children from 13-15 and add new requirements, like an eraser button. The current COPPA Rule, since the FTC’s recent update went into effect this past summer, requires parental consent before businesses can collect information about children online, including relatively de-identified information like IP addresses and device numbers that allow for targeted advertising.

Often, the debate about COPPA is framed in a way that makes it very difficult to discuss as a policy matter. With the stated purpose of “enhanc[ing] parental involvement in children’s online activities in order to protect children’s privacy,” who can really object? While there is recognition that there are substantial costs to COPPA compliance (including foregone innovation and investment in children’s media), it’s generally taken for granted by all that the Rule is necessary to protect children online. But it has never been clear what COPPA is supposed to help us protect our children from.

Then-Representative Markey’s original speech suggested one possible answer in “protect[ing] children’s safety when they visit and post information on public chat rooms and message boards.” If COPPA is to be understood in this light, the newest COPPA revision from the FTC and the proposed Do Not Track Kids Act of 2013 largely miss the mark. It seems unlikely that proponents worry about children or teens posting their IP address or device numbers online, allowing online predators to look at this information and track them down. Rather, the clear goal animating the updates to COPPA is to “protect” children from online behavioral advertising. Here’s now-Senator Markey’s press statement:

“The speed with which Facebook is pushing teens to share their sensitive, personal information widely and publicly online must spur Congress to act commensurately to put strong privacy protections on the books for teens and parents,” said Senator Markey. “Now is the time to pass the bipartisan Do Not Track Kids Act so that children and teens don’t have their information collected and sold to the highest bidder. Corporations like Facebook should not be profiting from the personal and sensitive information of children and teens, and parents and teens should have the right to control their personal information online.”

The concern about online behavioral advertising could probably be understood in at least three ways, but each of them is flawed.

Creepiness. Some people believe there is something just “creepy” about companies collecting data on consumers, especially when it comes to children and teens. While nearly everyone would agree that surreptitiously collecting data like email addresses or physical addresses without consent is wrong, many would probably prefer to trade data like IP addresses and device numbers for free content (as nearly everyone does every day on the Internet). It is also unclear that COPPA is the answer to this type of problem, even if it could be defined. As Adam Thierer has pointed out, parents are in a much better position than government regulators or even companies to protect their children from privacy practices they don’t like.

Exploitation. Another way to understand the concern is that companies are exploiting consumers by making money off their data without consumers getting any value. But this fundamentally ignores the multi-sided market at play here. Users trade information for a free service, whether it be Facebook, Google, or Twitter. These services then monetize that information by creating profiles and selling that to advertisers. Advertisers then place ads based on that information with the hopes of increasing sales. In the end, though, companies make money only when consumers buy their products. Free content funded by such advertising is likely a win-win-win for everyone involved.

False Consciousness. A third way to understand the concern over behavioral advertising is that corporations can convince consumers to buy things they don’t need or really want through advertising. Much of this is driven by what Jack Calfee called The Fear of Persuasion: many people don’t understand the beneficial effects of advertising in increasing the information available to consumers and, as a result, misdiagnose the role of advertising. Even accepting this false consciousness theory, the difficulty for COPPA is that no one has ever explained why advertising is a harm to children or teens. If anything, online behavioral advertising is less of a harm to teens and children than adults for one simple reason: Children and teens can’t (usually) buy anything! Kids and teens need their parents’ credit cards in order to buy stuff online. This means that parental involvement is already necessary, and has little need of further empowerment by government regulation.

COPPA may have benefits in preserving children’s safety — as Markey once put it — beyond what underlying laws, industry self-regulation and parental involvement can offer. But as we work to update the law, we shouldn’t allow the Rule to be a solution in search of a problem. It is incumbent upon Markey and other supporters of the latest amendment to demonstrate that the amendment will serve to actually protect kids from something they need protecting from. Absent that, the costs very likely outweigh the benefits.

Critics of Google have argued that users overvalue Google’s services in relation to the data they give away. One breath-taking headline asked Who Would Pay $5,000 to Use Google?, suggesting that Google and its advertisers can make as much as $5,000 off of individuals whose data they track. Scholars, such as Nathan Newman, have used this to argue that Google exploits its users through data extraction. But, the question remains: how good of a deal is Google? My contention is that Google’s value to most consumers far surpasses the value supposedly extracted from them in data.

First off, it is unlikely that Google and its advertisers make anywhere close to $5,000 off the average user. Only very high volume online purchasers who consistently click through online ads are likely anywhere close to that valuable. Nonetheless, it is true that Google and its advertisers must be making money, or else Google would be charging users for its services.

PrivacyFix, a popular extension for Google Chrome, calculates your worth to Google based upon the amount of searches you have done. Far from $5,000, my total only comes in at $58.66 (and only $10.74 for Facebook). Now, I might not be the highest volume searcher out there. My colleague, Geoffrey Manne states that he is worth $125.18 on Google (and $10.74 for Facebook). But, I use Google search everyday for work in tech policy, along with Google Docs, Google Calendar, and Gmail (both my private email and work emails)… for FREE!*

The value of all of these services to me, or even just Google search alone, easily surpasses the value of my data attributed to Google. This is likely true for the vast majority of other users, as well. While not a perfect analogue, there are paid specialized search options out there (familiar to lawyers) that do little tracking and are not ad-supported: Westlaw, Lexis, and Bloomberg. But, the price for using these services are considerably higher than zero:

Can you imagine having to pay anywhere near $14 per search on Google? Or a subscription that costs $450 per user per month like some firms pay for Bloomberg? It may be the case that the costs are significantly lower per search for Google than for specialized legal searches (though Google is increasingly used by young lawyers as more cases become available). But, the “price” of viewing a targeted ad is a much lower psychic burden for most people than paying even just a few cents per month for an ad-free experience. For instance, consumers almost always choose free apps over the 99 cent alternative without ads.

Maybe the real question about Google is: Great Deal or Greatest Deal?

* Otherwise known as unpriced for those that know there’s no such thing as a free lunch.

Geoffrey Manne is Lecturer in Law at Lewis & Clark Law School and Executive Director of the International Center for Law & Economics

Josh and Maureen are to be commended for their important contributions to the discussion over the proper scope of the FTC’s Section 5 enforcement authority. I have commented extensively on UMC and Section 5, Josh’s statement, and particularly the problems if UMC enforcement against the use of injunctions to enforce FRAND-encumbered SEPs before (see, for example, here, here and here). I’d like to highlight here a couple of the most important issues from among these comments along with a couple of additional ones.

First, there is really no sensible disagreement over Josh’s harm to competition prong. And to the extent there is disagreement over the proper role for efficiencies, given the existence of compelling arguments that we don’t need Section 5 at all (see, e.g., Joe Sims and James Cooper), what might have seemed like a radical position in Josh’s statement that the FTC enforce UMC only where no efficiencies exist, Josh’s position is actually something of a middle ground. In any case, the first prong of Josh’s statement (the harm to competition requirement) really should attract unanimity, as it essentially has here today, and all of the FTC’s commissioners should come out and say so, even if debate persists over the second prong. This alone would provide an enormous amount of certainty and sense to the FTC’s UMC enforcement decisions.

Second, sensible, predictable guidance is essential. In her recent speech, echoing the fundamental issue laid out so well in Josh’s statement and elaborated on in his accompanying speech, Maureen notes that:

For many decades, the Commission’s exercise of its UMC authority has launched the agency into a sea of uncertainty, much like the agency weathered when using its unfairness authority in the consumer protection area in the 1970s. In issuing our 1980 statement on the concept of “unfair acts or practices” under our consumer protection authority, the Commission acknowledged the uncertainty that had surrounded the concept of unfairness, admitting that “this uncertainty has been honestly troublesome for some businesses and some members of the legal profession.” This characterization just as aptly describes the state of our UMC authority today.

It seems uncontroversial that some guidance is required, and a pseudo-common law of un-adjudicated settlements lacking any doctrinal analysis simply doesn’t provide sufficient grounds to separate the fair from the unfair. (What follows is drawn from our amicus brief in the Wyndham case).

The FTC’s current approach to UMC enforcement denies companies “a reasonable opportunity to know what is prohibited” and thus follow the law. The FTC has previously suggested that its settlements and Congressional testimony offers all the guidance a company would need—see, e.g., here and here, where Chairwoman Ramirez noted that

Section 5 of the FTC Act has been developed over time, case-by-case, in the manner of common law. These precedents provide the Commission and the business community with important guidance regarding the appropriate scope and use of the FTC’s Section 5 authority.

But settlements (and testimony summarizing them) do not in any way constrain the FTC’s subsequent enforcement decisions; they cannot alone be the basis by which the FTC provides guidance on its UMC authority because, unlike published guidelines, they do not purport to lay out general enforcement principles and are not recognized as doing so by courts and the business community. It is impossible to imagine a court faulting the FTC for failure to adhere to a previous settlement, particularly because settlements are not readily generalizable and bind only the parties who agree to them. As we put it in our Wyndham amicus brief:

Even setting aside this basic legal principle, the gradual accretion of these unadjudicated settlements does not solve the vagueness problem: Where guidelines provide cumulative analysis of previous enforcement decisions to establish general principles, these settlements are devoid of doctrinal analysis and offer little more than an infinite regress of unadjudicated assertions.

Rulemaking is generally preferable to case-by-case adjudication as a way to develop agency-enforced law because rulemaking both reduces vagueness and constrains the mischief that unconstrained agency actions may cause. As the Court noted in SEC v. Chenery Corp.,

The function of filling in the interstices of [a statute] should be performed, as much as possible, through this quasi-legislative promulgation of rules to be applied in the future.

Without Article III court decisions developing binding legal principles ,and with no other meaningful form of guidance from the FTC, the law will remain unconstitutionally vague. And the FTC’s approach to enforcement also allows the FTC to act both arbitrarily and discriminatorily—backed by the costly threat of the CID process and Part III adjudication. This means the company faces two practically certain defeats—before the administrative law judge and then the full Commission, each a public relations disaster. The FTC appears to be perfectly willing to use negative media to encourage settlements: The House Oversight Committee is currently investigating whether a series of leaks by FTC staff to media last year were intended to pressure Google to settle the FTC’s antitrust investigation into the company’s business practices.

Third, if the FTC doesn’t act to constrain itself, the courts or Congress will do so, and may do more damage to the FTC’s authority than any self-imposed constraints would.

The power to determine whether the practices of almost any American business are “unfair” methods of competition (particularly if UMC retains the broad reach Tim Wu outlines in his post) makes the FTC uniquely powerful. This power, if it is to be used sensibly, allows the FTC to protect consumers from truly harmful business practices not covered by the FTC’s general consumer protection authority. But without effective enforcement of clear limiting principles, this power may be stretched beyond what Congress intended.

In 1964, the Commission began using its unfairness power to ban business practices that it determined offended “public policy.” Emboldened by vague Supreme Court dicta from Sperry & Hutchinson comparing the agency to a “court of equity,” the Commission set upon a series of rulemakings and enforcement actions so sweeping that the Washington Post dubbed the agency the “National Nanny.” The FTC’s actions eventually prompted Congress to briefly shut down the agency to reinforce the point that it had not intended the agency to operate with such expansive authority. The FTC survived as an institution only because, in 1980, it (unanimously) issued a Policy Statement on Unfairness laying out basic limiting principles to constrain its power and assuring Congress that these principles would be further developed over time—principles that Congress then codified in Section 5(n) of the FTC Act.

And for a time, the Commission used its unfairness power sparingly and carefully, largely out of fear of reawakening Congressional furor. Back in 1980, the FTC itself declared that

The task of identifying unfair trade practices was therefore assigned to the Commission, subject to judicial review, in the expectation that the underlying criteria would evolve and develop over time.

Yet we know little more today than we did in 1980 about how the FTC analyzes each prong of Section 5.

Moreover, courts may not support enforcement given this ambiguity, and in our Wyndham brief we supported Wyndham’s motion to dismiss for exactly this reason (and that was brought under the Commission’s unfairness authority where it even has some guidelines). As we wrote:

Since the problem is a lack of judicial adjudication, it might seem counter-intuitive that the court should dismiss the FTC’s suit on the pleadings. But this is precisely the form of adjudication required: The FTC needs to be told that its complaints do not meet the minimum standards required to establish a violation of Section 5 because otherwise there is little reason to think that the FTC’s complaints will not continue to be the Commission’s primary means of building law (what amounts to “non-law law”). But even if the FTC re-files its unadjudicated complaint to explain its analysis of the prongs of the Unfairness Doctrine, it will not have solved yet another fundamental problem: its failure to provide Wyndham with sufficient guidance ex ante as to what “reasonable” data security practices would be.

The same could be said of the FTC’s UMC enforcement. Section 5(n) applies to UMC, and states that:

The Commission shall have no authority under this section or section 57a of this title to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

[T]he truth is that there was little chance the FTC could have prevailed under the more rigorous Section 2 standard that anchors the liability rule to a demanding standard requiring proof of both exclusionary conduct and competitive harm. One must either accept the proposition that the FTC sought Section 5 liability precisely because there was no evidence of consumer harm or that the FTC believed there was evidence of consumer harm but elected to file the Complaint based only upon the Section 5 theory to encourage an expansive application of that Section, a position several Commissioners joining the Majority Statement have taken in recent years. Neither of these interpretations offers much evidence that N-Data is sound as a matter of prosecutorial discretion or antitrust policy.

None of the FTC’s SEP cases has offered anything approaching proof of consumer harm, and this is where any sensible limiting principles must begin—as just about everyone here today seems to agree. Moreover, even if they did adduce evidence of harm, the often-ignored problem of reverse holdup raises precisely the concern about over-enforcement that Josh’s “no efficiencies” prong is meant to address. Holdup may raise consumer prices (although the FTC has not presented evidence of this), but reverse holdup may do as much or more damage.

The use of injunctions to enforce SEPs increases innovation, the willingness to license generally and the willingness to enter into FRAND commitments in particular–all to the likely benefit of consumer welfare. If the FTC interprets its UMC authority in a way that constrains the ability of patent holders to effectively police their patent rights, then less innovation would be expected–to the detriment of consumers as well as businesses. An unfettered UMC authority will systematically curtail these benefits, quite possibly without countervailing positive effects.

And as I noted in a post yesterday, these costs are real. Innovative technology companies are responding to the current SEP enforcement environment exactly as we would expect them to: by avoiding the otherwise-consumer-welfare enhancing standardization process entirely—as statements made at a recent event demonstrate:

Because of the current atmosphere, Lukander said, Nokia has stepped back from the standardisation process, electing either not to join certain standard-setting organisations (SSOs) or not to contribute certain technologies to these organisations.

Section 5 is a particularly problematic piece of this, and sensible limits like those Josh proposes would go a long way toward mitigating the problem—without removing enforcement authority in the face of real competitive harm, which remains available under the Sherman Act.

On July 24, the Federal Trade Commission issued a modified complaint and consent order in the Google/Motorola case. The FTC responded to the 25 comments on the proposed Order by making several amendments, but the Final Order retains the original order’s essential restrictions on injunctions, as the FTC explains in a letter accompanying the changes. With one important exception, the modifications were primarily minor changes to the required process by which Google/Motorola must negotiate and arbitrate with potential licensees. Although an improvement on the original order, the Complaint and Final Order’s continued focus on the use of injunctions to enforce SEPs presents a serious risk of consumer harm, as I discuss below.

The most significant modification in the new Complaint is the removal of the original UDAP claim. As suggested in my comments on the Order, there is no basis in law for such a claim against Google, and it’s a positive step that the FTC seems to have agreed. Instead, the FTC ended up resting its authority solely upon an Unfair Methods of Competition claim, even though the Commission failed to develop any evidence of harm to competition—as both Commissioner Wright and Commissioner Ohlhausen would (sensibly) require.

Unfortunately, the FTC’s letter offers no additional defense of its assertion of authority, stating only that

[t]he Commission disagrees with commenters who argue that the Commission’s actions in this case are outside of its authority to challenge unfair methods of competition under Section 5 and lack a limiting principle. As reflected in the Commission’s recent statements in Bosch and the Commission’s initial Statement in this matter, this action is well within our Section 5 authority, which both Congress and the Supreme Court have expressly deemed to extend beyond the Sherman Act.

Another problem, as noted by Commissioner Ohlhausen in her dissent from the original order, is that

the consent agreement creates doctrinal confusion. The Order contradicts the decisions of federal courts, standard-setting organizations (“SSOs”), and other stakeholders about the availability of injunctive relief on SEPs and the meaning of concepts like willing licensee and FRAND.

The FTC’s statements in Bosch and this case should not be thought of as law on par with actual court decisions unless we want to allow the FTC to determine the scope of its own authority unilaterally.

This is no small issue. On July 30, the FTC used the Google settlement, along with the settlement in Bosch, as examples of the FTC’s authority in the area of policing SEPs during a hearing on the issue. And as FTC Chairwoman Ramirez noted in response to questions for the record in a different hearing earlier in 2013,

Section 5 of the FTC Act has been developed over time, case-by-case, in the manner of common law. These precedents provide the Commission and the business community with important guidance regarding the appropriate scope and use of the FTC’s Section 5 authority.

But because nearly all of these cases have resulted in consent orders with an administrative agency and have not been adjudicated in court, they aren’t, in fact, developed “in the manner of common law.” Moreover, settlements aren’t binding on anyone except the parties to the settlement. Nevertheless, the FTC has pointed to these sorts of settlements (and congressional testimony summarizing them) as sufficient guidance to industry on the scope of its Section 5 authority. But as we noted in our amicus brief in the Wyndham litigation (in which the FTC makes this claim in the context of its “unfair or deceptive acts or practices” authority):

Settlements (and testimony summarizing them) do not in any way constrain the FTC’s subsequent enforcement decisions; they cannot alone be the basis by which the FTC provides guidance on its unfairness authority because, unlike published guidelines, they do not purport to lay out general enforcement principles and are not recognized as doing so by courts and the business community.

Beyond this more general problem, the Google Final Order retains its own, substantive problem: considerable constraints upon injunctions. The problem with these restraints are twofold: (1) Injunctions are very important to an efficient negotiation process, as recognized by the FTC itself; and (2) if patent holders may no longer pursue injunctions consistently with antitrust law, one would expect a reduction in consumer welfare.

In its 2011 Report on the “IP Marketplace,” the FTC acknowledged the important role of injunctions in preserving the value of patents and in encouraging efficient private negotiation.

Second, the credible threat of an injunction deters infringement in the first place. This results from the serious consequences of an injunction for an infringer, including the loss of sunk investment. Third, a predictable injunction threat will promote licensing by the parties. Private contracting is generally preferable to a compulsory licensing regime because the parties will have better information about the appropriate terms of a license than would a court, and more flexibility in fashioning efficient agreements. But denying an injunction every time an infringer’s switching costs exceed the economic value of the invention would dramatically undermine the ability of a patent to deter infringement and encourage innovation. For this reason, courts should grant injunctions in the majority of cases.

increase innovation, the willingness to license generally and the willingness to enter into FRAND commitments in particular–all to the likely benefit of consumer welfare.

Monopoly power granted by IP law encourages innovation because it incentivizes creativity through expected profits. If the FTC interprets its UMC authority in a way that constrains the ability of patent holders to effectively police their patent rights, then less innovation would be expected–to the detriment of consumers as well as businesses.

And this is precisely what has happened. Innovative technology companies are responding to the current SEP enforcement environment exactly as we would expect them to—by avoiding the otherwise-consumer-welfare enhancing standardization process entirely.

[Jenni Lukander, global head of competition law at Nokia] said the problem of “free-riding”, whereby technology companies adopt standard essential patents (SEPs) without complying with fair, reasonable and non-discriminatory (FRAND) licensing terms was a “far bigger problem” than patent holders pursuing injunctive relief. She said this behaviour was “unsustainable”, as it discouraged innovation and jeopardised standardisation.

Because of the current atmosphere, Lukander said, Nokia has stepped back from the standardisation process, electing either not to join certain standard-setting organisations (SSOs) or not to contribute certain technologies to these organisations.

The fact that every licence negotiation takes places “under the threat of injunction litigation” is not a sign of failure, said Lukander, but an indicator of the system working “as it was designed to work”.

This, said [Dan Hermele, director of IP rights and licensing for Qualcomm Europe], amounted to “reverse hold-up”. “The licensor is pressured to accept less than reasonable licensing terms due to the threat of unbalanced regulatory intervention,” he said, adding that the trend was moving to an “infringe and litigate model”, which threatened to harm innovators, particularly small and medium-sized businesses, “for whom IPR is their life blood”.

Beat Weibel, chief IP counsel at Siemens, said…innovation can only be beneficial if it occurs within a “safe and strong IP system,” he said, where a “willing licensee is favoured over a non-willing licensee” and the enforcer is not a “toothless tiger”.

It remains to be seen if the costs to consumers from firms curtailing their investments in R&D or withholding their patents from the standard-setting process will outweigh the costs (yes, some costs do exist; the patent system is not frictionless and it is far from perfect, of course) from the “over”-enforcement of SEPs lamented by critics. But what is clear is that these costs can’t be ignored. Reverse hold-up can’t be wished away, and there is a serious risk that the harm likely to be caused by further eroding the enforceability of SEPs by means of injunctions will significantly outweigh whatever benefits it may also confer.

The Federalist Society has started a new program, The Executive Branch Review, which focuses on the myriad fields in which the Executive Branch acts outside of the constitutional and legal limits imposed on it, either by Executive Orders or by the plethora of semi-independent administrative agencies’ regulatory actions.

I recently posted on the Federal Trade Commission’s (FTC) ongoing investigations into the patent licensing business model and the actions (“consent decrees”) taken by the FTC against Bosch and Google. These “consent decrees” constrain Bosch’s and Google’s rights in enforce patents they have committed to standard setting organizations (these patents are called “standard essential patents”). Here’s a brief taste:

One of the most prominent participants at the FTC-DOJ workshop back in December, former DOJ antitrust official and UC-Berkeley economics professor Carl Shapiro, explained in his opening speech that there was still insufficient data on patent licensing companies and their effects on the market. This is true; for instance, a prominent study cited by Google et al. in support of their request to the FTC to investigate patent licensing companies has been described as being fundamentally flawed on both substantive and methodological grounds. Even more important, Professor Shapiro expressed skepticism at the workshop that, even if there was properly acquired, valid data, the FTC lacked the legal authority to sanction patent licensing firms for being allegedly anti-competitive.

Commentators have long noted that courts and agencies have a lousy historical track record when it comes to assessing the merits of new innovation, whether in new products or new business models. They maintain that the FTC should not continue such mistakes by letting its decision-making today be driven by rhetoric or by the widespread animus against certain commercial firms. Restraint and fact-gathering, institutional virtues reflected in a government animated by the rule of law and respect for individual rights, are key to preventing regulatory overreach and harm to future innovation.

Go read the whole thing, and, while you’re at it, check out Commissioner Joshua Wright’s similar comments on the FTC’s investigations of patent licensing companies, which the FTC calls “patent assertion entities.”